On Formal Education, Skills and Earnings: The Role of Educational Certificates in Earnings Determination

Abstract

Are diplomas and degrees important for earnings? If so, why? This paper enters the debates on these issues with two important advantages over prior research. First, it conceptualizes and measures formal education in terms of years and certificates. Second, it assesses worker skills directly, independently of both education and earings. This research shows that people with more years of schooling earn more partly because they are more productive. Those with certificates also earn more for this reason. And those with more years and certificates earn more than one would predict from their skills. Finally, women in medical and health occupations ear more for each additional year of schooling if they have a diploma or degree. The first result suggests human capital theory; the second and third point to market signalling or credentialism; and the fourth hints at segmented labour market theory. The enormous importance of educational certificates for earings suggests that market signalling theory is no minor corrective to human capital theory and that other aspects of education may be important for earnings as well. That the economic payoffs to years of education can depend upon diplomas or degrees implies that more than just market signalling theory is required and challenges current conceptions of the economic returns to education.